Knowledge and Insights
The Tax Cuts and Jobs Act
On November 2, 2017, the U.S. House of Representatives Ways and Means Committee released a comprehensive tax reform bill called the “Tax Cuts and Jobs Act.” The bill has a long way to go before it is law. It is not possible to predict what provisions will survive, what will be added, or what will change. Only that this is take one, as there likely will be lots of adaptations and dramatic action from the Washington, D.C. set in the near term.
The goal is for the House and Senate to each pass their respective versions of a tax bill before Thanksgiving, which is November 23, reconcile the differences, and agree on a single bill before the end of the year. It is an ambitious time frame to produce somewhat epic legislation.
Following is a summary of some of the most significant provisions of the Act:
- Reduce the number of tax brackets from seven to four – 12%, 25%, 35%, and 39.6%.
- Increase the standard deduction for individual taxpayers.
- Eliminate certain itemized deductions, including state and local income taxes, sales taxes, and medical expenses, while limiting other itemized deductions, such as imposing a $10,000 limit on real estate taxes and limiting mortgage interest to a maximum borrowing of $500,000, applicable only to a principal residence.
- Increasing the child tax credit from $1,000 to $1,600 (subject to phase-out at higher income levels).
- Providing a $300 “family flexibility credit” for each parent and non-child dependent (subject to phase-out at higher income levels).
- Retain retirement savings options, such as 401(k)s and IRAs.
- Repeal the Alternative Minimum Tax.
- Make changes to the sale of principal residence rules, requiring longer periods of ownership and use to claim exclusion of gain, and phases out the exclusion at higher income levels.
- Immediately increase the life-time exemption under the gift and estate taxes, while eventually phasing out the estate tax in six years.
- Retains the step-up in basis for inherited property.
- Lower the corporate tax rate to 20%. Personal service corporations would be taxed at 25%.
- Reduce the tax rate on business income for sole proprietorships, partnership, and S corporations to 25%, subject to certain limitations, while imposing “guard rails” aimed at preventing compensation for services from being taxed at lower rates.
- Allow businesses to immediately write off the full cost of new equipment, rather than depreciate over a period of years.
- Allow simplification for smaller businesses (generally ones with less than $25 million in revenue), including use of cash method of accounting, not requiring accounting for inventories, exclusion from UNICAP rules, and use of Completed Contract accounting for contractors.
- Repeals the Domestic Production Activities Deduction.
- Repeals certain credits, including the Historic Building Rehabilitation Credit and the Work Opportunity Tax Credit.
- Certain types of renewable energy projects, eligible for the investment tax credit, that were to expire after 2017 have been reinstated with the same phase-out schedule as solar energy projects.
- Provides rules to limit business interest deductions.
- Allows net operating losses to offset only 90% of income, thereby leaving 10% of income on which current tax will be due.
- Limits like-kind exchanges to only real estate.
- No longer allows a tax deduction for entertainment, amusement or recreation activities. Meals will remain 50% deductible.
- Makes changes to deferred compensation rules, when the compensation is no longer subject to a substantial risk of forfeiture.
- Preserves the Research & Development Tax Credit.
- Modernizes our international tax system to make us more competitive in global business.
This is just the beginning. We expect to see changes and different versions as the House and Senate continue to negotiate their respective bills and as constituent issues and trade groups get involved in protecting their interests in the legislative process. As always, through our lens of experience, Mercadien will monitor the progress and keep you updated on important developments in tax law. In the meantime, if you have any questions about your current tax situation or compliance, please contact me or any of our tax professionals at firstname.lastname@example.org or 609-689-9700.